What is Intrinsic value?
In Academy's lessons a business's intrinsic value is the cash it will deliver to its owners over its life, discounted to today, usually estimated with a DCF. It is an estimate, not a measurement: it depends on forecasts of growth and margins and on the discount rate, and two careful analysts can reach different numbers. Nobody can observe the true figure, so a price below an estimate is a claim to argue with evidence, not a fact.
Also called intrinsic worth, fundamental value, true value
Price is a fact; intrinsic value is an argument. It rests on forecasts of cash flow and a discount rate, and it changes whenever one of them changes.
One forecast, three discount rates (J3 case, illustrative)
- Stated share price
- $18.00
- Estimate at a 9.00% discount rate
- $13.14
- Same forecast at 8%
- $16.10
- Same forecast at 10%
- $10.97
- What the model gives: a range, not one number
- $10.97–$16.10Hypothetical company; terminal growth held at 2.5%.
'Undervalued' is a claim
Saying a price sits below intrinsic value means according to whose model, assuming what? Leave room for the estimate to be wrong (a margin of safety); it does not make the estimate right.